Travel to U.K. saves Americans nearly $150/trip post-Brexit

April 18, 2017 - Following the United Kingdom’s surprise vote to leave the European Union in June 2016, the value of the British currency has plummeted to its lowest level in three decades against the U.S. dollar. Exchange rate movements of such magnitude can have a significant impact on the cross-border flow of commerce as well as the broader economy.

Issuers in source markets might need to adjust their reward programs and authorization strategies accordingly. Travel merchants, likewise, might benefit from prioritizing business lines that depend on the cross-Atlantic travel. Regardless of the eventual outcome, the U.K.’s travel and tourism industry stands well-positioned to benefit from the devaluation of the British currency and can play a significant role in softening any economic disruption from the U.K.’s breakup with the E.U.

Depreciation of the pound

Tracking the effects of the pound’s depreciation on the U.K.’s bellwether travel and tourism industry—accounting for 6 percent of total exports and 13 percent of services exports in 2015—is one way to gauge the impact of the currency’s decline on the British economy. For many international consumers, the weaker British pound made the U.K. a more affordable and desirable travel destination in the months following Brexit. In fact, North American travelers saved an average $146 U.S. dollars per trip on U.K. travel in late 2016, spending1 percent less than a year earlier.

Currency impact

Inbound travel to a country gets a 3 to 4 percent boost for every 10 percentage points of real depreciation in the destination currency, assuming other relevant economic drivers remain the same, according to a recent IMF study. This effect has been closely substantiated with VisaNet data, but no travel corridor truly fits into the “average.” Applying real-time VisaNet data analysis reveals more of the nuances of the impact when viewed on a country-by-country basis.

The U.K.’s real effective2 exchange rate was down 16 percent in the second half of 2016 relative to its value a year earlier. Britain’s improved cost advantage as a destination has correspondingly helped boost inbound travel to the country from a number of origin markets, according to the Visa International Travel (VISIT) database, which shows 6 percent year-over-year growth in total arrivals from more than 80 origin and destination markets globally VISIT tracks on a monthly basis.

Currencies in the vast majority of countries (chart, quadrant II)—including the U.S., Canada, China, Germany, India, and many others—gained against the British pound in the second half of 2016. Consequently, their outbound travel to the U.K. also increased over the same period, according to VISIT. For example, cross-border arrivals in the U.K. from North America increased nearly 12 percent year-over-year (YoY) as the dollar grew stronger at the end of last year.

Home currency strength against the British pound versus arrivals to U.K.*
(YoY percent change, second half of 2016)

Not all countries benefitted from the weak pound. Notable exceptions included markets such as Argentina, where the currency actually lost ground against the pound in 2016 and dampened outbound travel to the U.K. Other markets (shown in quadrant IV) reduced their U.K. travel despite gains in the strength of their currencies against the pound. In Russia and Brazil, for example, protracted economic recessions have depressed consumer spending at home and abroad.

Weaker pound boosts cross-Atlantic travel spending

Growth in spending by North American visitors3 in the U.K. increased steadily in the months following Brexit to reach more than 50 percent YoY by December. Traveling to the U.K. also paid off, enabling North Americans to buy 18 percent more pounds sterling with every dollar in their pocket during that period, compared to a year earlier.

Fortunately for British businesses, revenues did not necessarily drop after the currency devaluation, according to an analysis of cross-border spending in the U.K. on Visa cards. In local currency terms, the North American travelers who saved nearly $150 on trip expenses spent an extra £59 per cardholder at U.K. merchants, compared to the same period in 2015. Moreover, travel spend shifted away from relatively ‘fixed’ expenses like lodging towards more discretionary categories as North American cardholders spent relatively more on shopping and restaurants.

Average U.K. travel savings per North American cardholder and how they were spent at U.K. merchants (By cross-border spend, YoY change, 2H2016)

Source: Visanet

Future outlook

Industry analysts believe the British pound is currently heavily undervalued due to heightened political uncertainty about Brexit. The currency should remain weak over the next year as the U.K. negotiates the terms of its exit from the E.U. This would help to maintain the U.K.’s cost advantage as a destination for international travelers in the near-to-medium term and fuel solid growth of inbound travel to the U.K., particularly among infrequent or first-time travelers.

References

1Savings per Visa cardholder on total trip expenses, 2H2016

2 Inflation adjusted and trade weighted

3 Based on VISIT and VisaNet data, North American visitors are defined by the number of Visa-branded consumer cardholders from U.S. and Canada who made face-to-face cross-border purchase transactions in the U.K. during the reference periods (Jul-Dec 2015 and Jul-Dec 2016).

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*Shading highlights the chart quadrants, which depict the change in the strength of each currency against the pound relative to the home country’s outbound travel to the U.K.